Fracking Sends Sand Sales Soaring

U.S. Silica Holdings Inc., which mines sand that can be used in hydraulic fracturing of oil and gas wells, sold 1.3 million tons of sand to the energy industry during the first quarter–a 45% increase over the same period last year. That helped fuel the company’s 6% boost in quarterly profit to $18.4 million, or 34 cents per share.

In fact, U.S. Silica’s energy customers are asking for new contracts seeking four to five times as much sand as they’re currently buying. The demand for finer grained sand is even cutting into supplies available to make glass and high-tech products.

During the fracking process, millions of pounds of sand are pumped into wells to hold open fissures in rock formations that contain crude oil and natural gas. Grains of a special variety of sand found in northern states like Wisconsin, where U.S. Silica operates mines, are well suited to the task.

And the industry want exponentially more of it, with a growing number of drillers telling investors that fracking with more sand is the quickest, cheapest way to increase oil and gas output.

A year ago, the average well used roughly 2,500 tons of sand, U.S. Silica Chief Executive Bryan Shinn said. Today’s wells often use double that amount, and some wells have as much as 8,000 tons of sand pumped into them, he said.

“That’s almost a whole unit train of sand. Imagine a mile-long unit train just filled with sand,” he said.

The company projects demand will grow by 25% this year. But it comes at a cost. U.S. Silica instituted broad price increases in March and then raised sand prices again, albeit slightly, in April. New contracts often require higher price tags. Last month PacWest Consulting Partners, which tracks the frack sand market, raised its estimate for sand prices at the mine–which doesn’t include transportation and handling costs–to $56 per ton, up from $50 per ton.

“We expect to see that impact broadly across all basins–not just in the Permian where things are very hot,” Mr. Shinn said of the West Texas basin where oil and gas companies are ramping up drilling.

Still, there are challenges. U.S. Silica’s $180 million in first-quarter revenue was higher by 47%, but costs crept up as well. Wells Fargo analyst Matt Conlan called margins “somewhat compromised” by sales of certain sand varieties and the lingering impact of high transportation costs last year.

Some communities in Wisconsin and Minnesota, where the highest quality sand is found, are opposed to new mines. U.S. Silica has a new mine and sand processing plant starting up in Utica, Ill., which will add another 1.5 million tons of capacity, but permitting new mines can take years.

“It’s just getting tougher and tougher to find sites you’d be proud to own in any kind of market condition,” Mr. Shinn said.